Late last month, shortly before adopting amendments to Regulation 13D/G, the Securities and Exchange Commission (“SEC") announced civil charges against several officers, directors, and major shareholders of public companies for failing to satisfy their timely reporting obligations. The SEC also charged the affiliated public companies for contributing to the reporting failures by insiders.
This latest Enforcement sweep included charges against six individuals, all of whom failed to timely file Form 4s within two business days of the execution date. The six individuals missed their reporting deadlines on more than 10 transactions, in many instances by several months, and in some instances by more than a year.
Two individuals were charged with failing to timely file Schedule 13D or Schedule 13G beneficial ownership reports. In each of these instances, the individuals failed to timely amend their reports when their beneficial ownership changed by a material amount. In one instance, the individual failed to timely file an initial Schedule 13G within the 10-calendar day filing deadline.
In addition, the SEC charged five public companies with contributing to the failures of their respective insiders. In each of the “cease-and-desist" orders, the SEC observed: “Although the Commission has encouraged the practice of many issuers to 'help their [officers and directors] to submit the  filings on their behalf . . . [in order] to facilitate accurate and timely filing,' Section 16 places the responsibility to report changes in securities ownership on insiders."
The SEC went on to warn: “issuers who voluntarily accept certain responsibilities and then act negligently in the performance of those tasks may be liable as a cause of Section 16(a) violations by insiders." The six individuals and five companies charged in this sweep incurred aggregate monetary penalties of $1.57 million, with an average penalty in excess of $142,000.
Clearly the SEC has stepped up its enforcement game against recidivist late filers and those companies that have undertaken to assist their insiders in meeting their reporting obligations. The actions represent a firm response to habitually late filers, demonstrating the Commission's determination to reinforce the importance of timely and complete filings by Section 13(d) and Section 16 reporting persons.
As noted earlier, the SEC recently adopted changes to modernize the reporting requirements by accelerating filing deadlines. Under the newly adopted rules, initial Schedule 13D filers must report their holdings within 5 business days (previously ten calendar days) after crossing the 5% reporting threshold. Passive investors with more than 5% and less than 20% must file their initial Schedule 13G reports within 5 business days, and qualified institutional investors (QIIs) must file their initial Schedule 13Gs within 45 calendar days of the end of the quarter in which they crossed the reporting threshold. QIIs could previously file their initial reports 45 calendar days after the end of the calendar year. For more on the SEC amendments adopted earlier this month see our client alert.
Following the SEC's adoption of accelerated filing deadlines it is more important than ever for significant shareholders and their affiliated issuers to ensure adequate controls are in place to capture the required information and meet the new filing deadlines that go into effect on February 5, 2024 in order to avoid late, deficient and/or missing Schedule 13D and Schedule 13G reports that can prompt unwanted SEC Enforcement attention. For more information on this string of enforcement actions see the SEC's press release.
Thank you to associates Chris Connelly and Nicholas Whetstone in our Orange County office for their assistance with this update.